What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That’s why when we briefly looked at Garmin’s (NASDAQ:GRMN) ROCE trend, we were pretty happy with what we saw.
What is Return On Capital Employed (ROCE)?
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Garmin:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.18 = US$959m ÷ (US$6.6b – US$1.1b) (Based on the trailing twelve months to September 2020).
So, Garmin has an ROCE of 18%. In absolute terms, that’s a satisfactory return, but compared to the Consumer Durables industry average of 14% it’s much better.
View our latest analysis for Garmin
Above you can see how the current ROCE for Garmin compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Garmin here for free.
The Trend Of ROCE
While the returns on capital are good, they haven’t moved much. Over the past five years, ROCE has remained relatively flat at around 18% and the business has deployed 55% more capital into its operations. Since 18% is a moderate ROCE though, it’s good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line
The main thing to remember is that Garmin has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 317% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.
Like most companies, Garmin does come with some risks, and we’ve found 1 warning sign that you should be aware of.
While Garmin isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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